16 June 2014

Sidley Shale and Hydraulic Fracturing Report

Volume 3, No. 24


EIA projects U.S. natural gas output will set record in 2014. A recent report by the U.S. Energy Information Administration (EIA) projects that U.S. natural gas output will set a new record in 2014, reaching 73 billion cubic feet (Bcf) per day. Additional growth is expected to be supported by new pipeline infrastructure in the Marcellus Shale which is providing market access to previously stranded gas. The EIA projects that domestic demand for electricity and industrial, commercial, and residential consumption will increase to 66.36 Bcf per day.

Notwithstanding record production, EIA reports natural gas storage is below average. Despite record natural gas production, the harsh winter has depleted natural gas storage reserves significantly. EIA reports that natural gas storage injections are over 40% (922 Bcf ) below the 5-year average of 2302 Bcf, and 748 Bcf below last year’s levels. While storage levels have been increasing with increased production, storage rates could decline, depending on the demand for electricity for air conditioning this summer. Unless storage levels approach the long-term average by the end of the injection season in October, there could be increased pressure on electricity prices next winter.

USFWS faces legal challenges over Endangered Species Act listing decision. Industry trade associations and local governments have filed suit against the U.S. Fish and Wildlife Service (USFWS) challenging the decision to list the lesser prairie chicken as threatened under the Endangered Species Act. The listing has the potential to adversely affect oil and gas development in several western states. The plaintiffs allege USFWS failed to account for the conservation plan implemented by the Western Association of Fish and Wildlife Agencies (WAFWA) under which 160 companies have enrolled 9 million acres and committed more than $43 million to conserve lesser prairie chicken habitat. Reportedly, a number of environmental groups also intend to challenge USFWS’ decision, alleging the agency included too many exceptions that will harm the lesser prairie chicken and should have listed the lesser prairie chicken as endangered.

EPA extends deadline to comment on hydraulic fracturing ANPR. On June 12, the Environmental Protection Agency (EPA) announced that it would extend the deadline for public comment on its advanced notice of proposed rulemaking (ANPR) regarding disclosure of chemicals used in hydraulic fracturing fluids by 30 days until September 18. EPA is using the ANPR to solicit information regarding the potential need for broader public disclosure of chemicals used in hydraulic fracturing beyond what is already required by state governments. EPA issued the ANPR in response to a petition by environmental groups seeking a federal rule mandating public disclosure of the chemicals used in fracturing fluids without trade secret protections.


North Dakota: Producers seek solutions to reduce flaring. In response to new regulations limiting natural gas flaring, oil producers in the Bakken Shale in North Dakota are seeking alternative options for using the natural gas produced alongside the oil being extracted in the Bakken. Beginning June 1, 2014 drilling applications must include a “Gas Capture Plan,” and after one year of production, producers must pay royalties and taxes on flared gas. While pipelines and other infrastructure will be critical to reducing flaring, the ever-changing array of production wells will likely limit access to pipeline infrastructure for many wells. Producers are currently exploring alternatives such as conversion to compressed natural gas (CNG) that can be used as a fuel at other drilling sites. Statoil SA has already implemented a pilot CNG program. If producers are unable to develop alternative strategies to capture and use natural gas, more draconian measures may be necessary to limit flaring, including reducing oil production.

Colorado: Environmental group sues state, oil industry for opposing local moratorium on hydraulic fracturing. The Community Environmental Legal Defense Fund (CELDF), a key sponsor of local ordinances banning hydraulic fracturing, has sued the state of Colorado and the Colorado Oil and Gas Association (COGA) in response to their lawsuits challenging the local ban on hydraulic fracturing passed last year by the city of Lafayette. The lawsuit alleges that state’s enforcement of oil and gas regulations, as well as COGA’s opposition to the local moratorium infringe on the community’s right to self governance. The lawsuit was filed on behalf of two Lafayette residents, but the complaint seeks class action certification.


China: FTSI and Sinopec announce joint venture to develop shale resources in Sichuan basin. FTS International (FTSI) announced a joint venture with Chinese energy company Sinopec to develop shale resources in the Sichuan basin in China. The joint venture will be called SinoFTS. FTSI was a pioneer in the U.S. hydraulic fracturing industry and remains among the largest suppliers of well completion services in the United States. SinoFTS will service wells for Sinopec and other oil and gas companies in China. While SinoFTS will initially concentrate on the shale-rich Sichuan basin, eventually it may seek to expand to other development opportunities in China. China’s shale gas reserves are the largest in the world – nearly double those of the United States. However, the depth and geologic complexity of the shale formation in the Sichuan basin make development of the reserves more challenging than the more productive U.S. shale plays.


American Energy Partners spends $4.25 billion in Permian, Marcellus and Utica formations. American Energy Partners LP recently announced plans to invest $4.25 billion in key shale plays. The investments include a lease of 63,000 net acres in Texas’ Permian Basin, where Enduring Resources LLC is currently producing 16,000 barrels of oil equivalent per day. A 27,000 acre leasehold in the Utica shale in Ohio is expected to produce 40 million cubic feet of natural gas equivalent per day, while a 48,000 acre leasehold in the Marcellus shale in West Virginia is expected to produce 135 million cubic feet of natural gas equivalent per day. Over the past nine months, American Energy has raised $10 billion for strategic investment in five key shale plays.

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